Five financial lessons we can take from COVID-19

Our personal finances have borne much of the brunt of change – be it our superannuation, savings, investments, insurance or debts. Whether we like it or not, we’ve learned some valuable financial lessons during this pandemic, including the importance of having a financial plan.
While it will look different for each and every one of us, it’s important to reflect on how the lessons we’ve learned can help us prepare for such periods of uncertainty and disruption in the future.

We’ve outlined five ways for managing personal finances in the future.

1. Always have emergency funds available

It’s generally recommended you maintain enough accessible cash to cover daily essentials, mortgage costs and other loans for up to three months. This means if your income suddenly stops, you have a short-term buffer to help you prioritise payments and debts for
immediate needs, like housing, food and utilities.

Now is a good time to review your essential household expenditure and see how it’s changed. Think about whether this is likely to be a permanent or temporary change. For example, if you’re now working from home, you’re probably saving money on things like transport, lunches and work clothes. Your discretionary expenditure has probably also reduced, with less dining out and entertainment spend.

Maybe you’ve discovered a passion for cooking during the lockdown and think you’ll now invite friends over for dinner parties rather than always meeting at restaurants. All these things could generate significant savings.

If you do find you’ve got extra cash available, do you need it now? If not, think about whether you could you add to your savings or emergency fund? Or maybe even invest it?

2. Don't neglect your superannuation

When finances become stretched, it’s easy to take a short-term view and focus on your immediate needs. But superannuation is designed to help you build retirement savings, and as with any investment, cashing out at the wrong time can be costly.

So, while the Government is allowing those financially impacted by COVID-19 to access some of their superannuation early, this will affect your long-term superannuation balance and may affect your future retirement income. It shouldn't be viewed as an easy source of short-term funding, as the younger you are, the more likely you’ll lose out in the long run. We recommend you speak to a financial adviser before making any decisions about withdrawing money from your superannuation.

A smarter approach is to try to maintain regular investments into your superannuation, regardless of whether share markets are rising or falling. If your employer is making the compulsory SG contributions then you’ll already be benefiting from this. Over the long term, it means you’ll be buying more of an asset when prices are low and buying less when prices are high, averaging out the price.

You should also be aware of scammers trying to convince you they can help you access your super early. The only way to withdraw your super under the COVID-19 early release scheme is via the Australian Taxation Office.

Here are some ways to protect yourself from scams:

• Familiarise yourself with rules around super. Other than for extreme financial hardship or compassionate reasons, you generally can’t access your super until you’re aged 55-60.
• Don’t click on links in suspicious-looking emails, type the full website address into your browser instead.
• Don’t share your personal information with anyone you don’t know or trust, even if they say they’re from your superannuation fund. Check with your fund to verify their authenticity.

3. Build your wealth through a diversified portfolio

If you’re lucky enough to have no debt (other than a mortgage) and a good level of cash savings, you might consider investing some money to build future wealth.

While share market volatility and economic uncertainty don’t make it an easy time to be an investor, smart investors can turn any situation into an opportunity. Now is a great time to review your current investments and think about how to position them for future
growth.

Can you invest more and take advantage of low share prices? Is your investment portfolio diverse enough? Do you have a good balance of different asset classes, industries, sectors and even country exposure? Is your tolerance for risk the same in the new world we live in, and / or have your investment timeline or goals changed?

Take this opportunity to do some research and speak to a financial adviser before making any significant decisions about your investments.

4. Protect yourself and your family

Insurance aims to protect you and your family from the unexpected. And COVID-19 has certainly shown that the unexpected can happen.

Whether it’s life insurance, income protection or trauma insurance, consider whether you have the right type and level of cover. Carefully read all the terms and conditions so you know what you’re covered for, particularly for things such as a pandemic. Not all policies will cover this.

It’s also an opportune time to consider writing or reviewing your Will. Many people put it off, particularly when they’re younger, but it’s something everyone should have, regardless of their level of wealth.

As your circumstances change, your Will may need updating – if you get married or divorced, have children, or receive an inheritance for example. You can also create a ‘living will’, which outlines how you want to be treated medically if you're incapacitated or unable to make decisions for yourself.

5. Review your business concentration risk

If you’re a business owner, you’ve no doubt experienced a change due to COVID-19. Regardless of whether the impact has been positive or negative, a dramatic change in business conditions acts as a good reminder to review and update business continuity plans and risk management strategies to future-proof your business and make it more sustainable and agile.

Even if you specialise in a particular industry or product, don’t let this be a barrier. During the
pandemic, many businesses have taken a deeper look at their core underlying skills to see how they could adapt and survive.

Manufacturers used their engineering skills to produce ventilators, hand sanitisers and other essential medical items. Pubs and cafes began to sell essential household items alongside takeaway food and drinks to give their customers a reason to return. Clothing businesses created gowns and masks for frontline workers.

If you’re worried your business is at risk of being too concentrated, think big, be creative and find ways to mitigate it – new products, different payment methods, partnership strategies and insurance cover. Many businesses won’t continue to operate as they did before, so embrace the opportunity for change and turn it into a competitive advantage.

Don’t look back

While it’s been a difficult few months, COVID-19 has taught us all some valuable lessons about what’s important in life and how we can be better prepared for the future. Taking steps now to future-proof your finances will put you in a stronger position if we’re faced with another crisis of this scale.

Next read: Five things to consider before accessing superannuation early